When people come to me for their mortgage, they have often already made their decision between a Fixed Rate and Adjustable Rate Mortgage (ARM). These are some of their comments:
Considerations by those choosing a Fixed Rate Mortgage
- The principal and interest payments are predictable, they can budget for them and they know there will not be any surprises if interest rates move up.
- Fixed Rate Mortgages are safer. (They will sleep better at night)
- If mortgage interest rates go up, they don’t have any upside risk because their interest rate is guaranteed for the full term of the mortgage. If mortgage interest rates go down, they still have the option to refinance and take advantage of a lower fixed interest rate.
Considerations by those choosing an Adjustable Rate Mortgage
- They are only going to stay in their home for a few years, therefore an ARM that is fixed for a period such as the first 3, 5, or 7 years offers a lower initial interest rate and doesn’t create any long term risk for them.
- The initial payment is lower so they can afford a more expensive home
- They are confident that the interest rate on their ARM will drop in future years.
- They are expecting an increase in household income, therefore will be able to afford a higher payment if their ARM adjusts upwards in future years.
- They want to keep their mortgage payment as low as possible now, so they have more capital available to invest in other areas such as stocks or mutual funds.
- They have a friend who has an Adjustable Rate Mortgage and the friend is happy with it.
When it comes to making a choice between a Fixed Rate or Adjustable Rate mortgage, I have learned over the years to let homebuyers make their own decision. For those who are choosing an Adjustable Rate Mortgage, my goal is to help them understand how they work and the risks involved.
Resources for understanding Adjustable Rate Mortgages
- The “Consumer Handbook on Adjustable Rate Mortgages” published by the Federal Reserve Board Office of Thrift Supervision. Federal law requires that all mortgage applicants applying for an Adjustable Rate Mortgage receive a copy of this booklet from their lender. Here is a link to the Federal Reserve Board website if you are interested in detailed information. LINK
- The specific ARM description form that describes the parameters of the ARM you are considering. Federal Law requires your Loan Officer to provide this form. There are literally hundreds of different ARM programs. Understanding the specific parameters of the ARM you are considering is essential.
- The ARM description page on my web site: LINK
The best decision for one homebuyer may not be the best for others. What’s your choice, Fixed Rate Mortgage or Adjustable Rate Mortgage?
